Europe benzene-naphtha spread narrows as spot feedstock cost rises

LONDON (ICIS)–The spread between benzene and naphtha pricing in Europe is narrowing as naphtha spot values have jumped since April.

The spread is also impacted by benzene in Europe being priced at around $80/tonne below Asia, where the spread to naphtha is more reasonable.

Price recovery so far is most positive in Asia, as it was hardest hit first by the pandemic.

The narrow spread in Europe also suggests demand for benzene is weak because the feedstock cost rise cannot yet be passed on, but the benzene spread to naphtha could change significantly when demand returns.

The spread between the two products provides a gauge to the profitability of benzene production – a wider spread suggests healthier margins for producers and a narrower spread indicating compressed margins.

While lockdown restrictions are gradually easing, with activity in the benzene market slowly returning, the recovery in demand will be slow given the severe impact the lockdowns had in the key end industries of automotive and construction.

Key benzene derivative styrene demand remains low, also on the back of weak end-use automotive and construction demand.

Benzene spreads to naphtha recovered somewhat in mid-April after falling from a healthy level in January-March, but took a further slump in the week ending 15 May.

The weekly spread against benzene has fallen to around $60/tonne – and a healthy spread is considered at around $200/tonne.

A benzene-naphtha spread of below $150/tonne makes benzene uneconomical to extract, and that leaves the question of what to do with the benzene if one has the reformate and pygas and they are not extracting.

It had dropped to nearly $40/tonne in early April, when benzene spot prices had plunged to 18-year lows on collapsing demand.

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HISTORIC SLUMP
The benzene spot market posted substantial losses in late March on a sharp drop in oil prices, with demand floundering because of the profound impact on the industry caused by the coronavirus pandemic.

The spread was over $330/tonne in January, when benzene prices were boosted by reduced availability.

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Average benzene prices for the week ended 15 May stood at $275/tonne CIF (cost, insurance, freight) ARA (Antwerp-Rotterdam-Amsterdam).

Naphtha prices were $215.5/tonne CIF NWE (northwest Europe).

Naphtha prices fell to $134/tonne on 24 April, but have since surged by 60% while benzene prices have only risen by 12% in the same period.

Firmer crude prices have boosted values for benzene, as prices hover around $300/tonne, with naphtha around $258/tonne.

Open-specification naphtha spot values have been backed by steady crude futures and healthy cracker operations.

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As travel restrictions lift, there could be a slow pick-up in activity and demand, but recovery rates will vary according to country and sector.

Where automotive demand is concerned, it is likely to take a significant amount of time before consumption levels lift to even 2019 levels, which were below 2018.

See interactive graph below for car sales in April, which recorded a historic fall of more than 75% in the EU.

While crude prices are likely to be supported by any upturn in demand, the naphtha outlook is also fundamentally bearish on length and macroeconomic uncertainty.

Benzene is used to produce a number of intermediates that are used to create polymers, solvents and detergents.

Focus article by Helena Strathearn

Interactive content by Miguel Rodriguez-Fernandez